An article in The Age by Lindy Edwards touches on the important observation that functioning market economies require certain ethical standards. The concluding paragraph gives a good indication of this;
As governments rethink how to regulate their economies after this crisis we might see a rethink in what they need to do to foster robust economies. The focus on incentives and competition may yet give way to a greater focus on the ethical limits that we need for markets to work well. The new era could be one in which the mantra shifts from "greed is good" to one of "ethics is essential to efficiency". Now that would be radical.
A couple of things I'd dispute in the article as a whole though. Most notably the iodea that it needs other social scientists to sort this out - there is a great error in equating economists with orthodox economists.
The second point is that the very vague arm waving about ethics doesn't actually explain what Government needs to do differently. After all, the "economic rationalist" revolution that started in the mid 70s and developed real legs in the 80s was a reaction to government control of the economy. That government intervention had in some part stemmed from a misreading of Keynes - trying to use fiscal policy as a kind of fine tuner of economic activity, or worse a permanent underlying stimulus, rather than as just the equivalent of a defribulator when the economy has seized.
But to think of "ethics" in isolation is to think of only one dimension of the institutional settings that are usually assumed away in orthodox theory - not least of which is the operation of finance itself. The second issue is exactly how economic models or modes get transmitted and the fact that there is something about late twentieth century economies that has allowed selfishness to be successfully transmitted - this takes you to the thery of the evolution of economic forms.
Finally to apply any kind of mathematical rigour to these ideas, to develop theories that relate actual quantities of goods produced and consumed you will wind up in the mathematics of complex systems.
Beinkocker's excellent book The Origin of Wealth covers many of these issues in a good omnibus kind of way. Unfortunately the flavour of the book is that it is written from the point of view of a management consultant rather than theoretician or polocy adviser.
The Edwards article now joins a growing list of attempts to diagnose the problem, but few have practical solutions as to what to do differently. I have some thoughts and they extend all the way from the need to develop a "humanist moral code" to the kinds of ideas that I expect to find in Nudge (see earlier post). What we also need is lots of people to start questioning all the assumptions they make about how the world works.
Monday, August 03, 2009
Friday, July 31, 2009
The value of a network
Breathless reports of a speech by the new ICANN chief in which he has challenged the validity of Metcalfe's Law.
It is stupid to report it as if it is a eevelation since the "Law" has always been based on the simple calculation that the number of links between nodes on a network of n nodes is n*(n-1). From this Metcalfe opined that the value of the network grew in proportion to n squared.
Andrew Odlyzko* has pointed out back in 2006 that this is based on an assumption that each link is equally valuable. Odlyzko proposed an alternative that the network's value increases as n*logn which effectively assumes an exponentially decaying value in each extra link.
I haven't seen the actual paper referred to in the above, but it sounds like it is referring to yet another feature that is the feature of "congestion" effects. In the case of the article Bill Gates found he had so many friends on Facebook none of it was of any value. An alternative version of this was offered by Eli Noam in the introduction to Telecommunications in Europe. In that Eli explained that large corporations had benefitted greatly from network effects in telecommunications but it got to a point where congestion and other factors resulted in them having a higher utility in private not public networks.
That is, just as positive network effects could explain the growth of telecommunications networks and a justification for effectively mandated monopoly (I'd have to digress on a history of ATT), the negative effect also had a role in seeing the pressures build for deregulation and the relaxation of rules prohibitting interconnection of private and public networks.
I think there are two important lessons here. The first is that Metcalfe's Law certainly isn't a law at all and should not be referred to as such - at best it is Metcalfe's Conecture or Hypothesis. The second is that networks do not behave uniformly and are deserving of far more analysis than they receive.
* I see that Joshua Gans has even blogged about Odlyzko. I concur with him on how amazing his output has been. The paper I find most interesting was the one when he pointed out that the capacity of the Internet wasn't doubling every hundred days - just when everyone believed it did!
It is stupid to report it as if it is a eevelation since the "Law" has always been based on the simple calculation that the number of links between nodes on a network of n nodes is n*(n-1). From this Metcalfe opined that the value of the network grew in proportion to n squared.
Andrew Odlyzko* has pointed out back in 2006 that this is based on an assumption that each link is equally valuable. Odlyzko proposed an alternative that the network's value increases as n*logn which effectively assumes an exponentially decaying value in each extra link.
I haven't seen the actual paper referred to in the above, but it sounds like it is referring to yet another feature that is the feature of "congestion" effects. In the case of the article Bill Gates found he had so many friends on Facebook none of it was of any value. An alternative version of this was offered by Eli Noam in the introduction to Telecommunications in Europe. In that Eli explained that large corporations had benefitted greatly from network effects in telecommunications but it got to a point where congestion and other factors resulted in them having a higher utility in private not public networks.
That is, just as positive network effects could explain the growth of telecommunications networks and a justification for effectively mandated monopoly (I'd have to digress on a history of ATT), the negative effect also had a role in seeing the pressures build for deregulation and the relaxation of rules prohibitting interconnection of private and public networks.
I think there are two important lessons here. The first is that Metcalfe's Law certainly isn't a law at all and should not be referred to as such - at best it is Metcalfe's Conecture or Hypothesis. The second is that networks do not behave uniformly and are deserving of far more analysis than they receive.
* I see that Joshua Gans has even blogged about Odlyzko. I concur with him on how amazing his output has been. The paper I find most interesting was the one when he pointed out that the capacity of the Internet wasn't doubling every hundred days - just when everyone believed it did!
Warning - politicians thinking!
Lindsay Tanner continues to confound our expectation of Australian politicians with another thoughtful piece in the Oz. He writes of the ideas of Cass Sunstein and the idea of "the nudge" the idea of doing things that might guide behaviour rather than direct it.
It is a delight to read a politician who understands that the influence that can be exerted by Government is more than just legislation, taxation and subsidy. Getting the vast army of public servants who need to become the politcians' allies in the world of nudge will be a greater challenge.
But we are in serious danger between a left-winger advocating nuance not control and the right-wing Mr Abbott advocating constitutional change of actually seeing sustained intellectual engagement by politicians not just reaction from a well worn phrase book. The danger is that we've never seen this before and hence don't know whre it might end.
It is a delight to read a politician who understands that the influence that can be exerted by Government is more than just legislation, taxation and subsidy. Getting the vast army of public servants who need to become the politcians' allies in the world of nudge will be a greater challenge.
But we are in serious danger between a left-winger advocating nuance not control and the right-wing Mr Abbott advocating constitutional change of actually seeing sustained intellectual engagement by politicians not just reaction from a well worn phrase book. The danger is that we've never seen this before and hence don't know whre it might end.
Thursday, July 30, 2009
Battlelines
I haven't read all of Tony Abbott's book yet. I've been looking forward to it as I knew he was going to discuss the future of the Federation - and I'm not disappointed.
But it was mighty strange that the book was launched in the same week as the National Health Reform Commission reported. This is the report about which the Prime Minister has had to dissemble on his rash promise to have worked with the States to fix the health system or to take it over.
His problem is of course that there is no rational way to take it over.
Here is where Abbott has his bright idea - which is to propose a new section 51A to the constitution that allows the Commonwealth to increase its own powers by the expediency of passing the relevant bill twice eparated by six months.
It is an excellent suggestion. It solves the vexed problem of the fact that no one wants the States but no one can be prepared to suggest that they be abolished - plus the legislation to abolish them needs to come from a State Parliament.
Tony correctly identifies that this is a conservative stance - the men who gathered to draft the constitution did not write a Federal constitution because of a passionate desire to protect the States but as a matter of expedience.
In the 7:30 report interview that touched on the change and Rudd's dilemma. Paul Kelly in the Oz touched on the issue a bit more but seemed to dismiss the chance of the constitutional change getting up out of hand.
Peter van Onselen also in the Oz is equally dismissive of the constitutional change. Greg Craven of ACU is quoted as suggesting that the failure of the republic referendum is a pointer to the success of Abbott's "Change 51" (As I will now call it). This is complete bunk - the people know that the republic issue was all gloss and no substance, "Change 51" has the power to significantly impact on the quality of our Government and hence on our services.
The question - how do we build the "Change 51" movement.
But it was mighty strange that the book was launched in the same week as the National Health Reform Commission reported. This is the report about which the Prime Minister has had to dissemble on his rash promise to have worked with the States to fix the health system or to take it over.
His problem is of course that there is no rational way to take it over.
Here is where Abbott has his bright idea - which is to propose a new section 51A to the constitution that allows the Commonwealth to increase its own powers by the expediency of passing the relevant bill twice eparated by six months.
It is an excellent suggestion. It solves the vexed problem of the fact that no one wants the States but no one can be prepared to suggest that they be abolished - plus the legislation to abolish them needs to come from a State Parliament.
Tony correctly identifies that this is a conservative stance - the men who gathered to draft the constitution did not write a Federal constitution because of a passionate desire to protect the States but as a matter of expedience.
In the 7:30 report interview that touched on the change and Rudd's dilemma. Paul Kelly in the Oz touched on the issue a bit more but seemed to dismiss the chance of the constitutional change getting up out of hand.
Peter van Onselen also in the Oz is equally dismissive of the constitutional change. Greg Craven of ACU is quoted as suggesting that the failure of the republic referendum is a pointer to the success of Abbott's "Change 51" (As I will now call it). This is complete bunk - the people know that the republic issue was all gloss and no substance, "Change 51" has the power to significantly impact on the quality of our Government and hence on our services.
The question - how do we build the "Change 51" movement.
Another view
Forbes has an interesting article with an alternative view of the Great Depression.
The thesis appears to be that the 1920s was a period of massive productivity improvements driven by electrification and the internal combustion engine. This resulted in falling prices, a growth in inequality and an explosion in executive compensation.
The depression in this view was due to the policy response to this;
The policy responses that created the most trouble in the 1920s and 1930s--that made the Depression "great"--were those that tried to undo the inevitable consequences of technological progress: trying to keep prices from falling, trying to keep wages high, and demonizing those who gained great wealth from the revolution in technology.
This view seems to be that the depression became great by the initial response to it, rather than it was great in and of itself. It is an interesting theory, one I probably don't subscribe to. However, the fact of productivity improvement as well as the expansion in capital markets probably does need to factor into any meaningful analysis.
The thesis appears to be that the 1920s was a period of massive productivity improvements driven by electrification and the internal combustion engine. This resulted in falling prices, a growth in inequality and an explosion in executive compensation.
The depression in this view was due to the policy response to this;
The policy responses that created the most trouble in the 1920s and 1930s--that made the Depression "great"--were those that tried to undo the inevitable consequences of technological progress: trying to keep prices from falling, trying to keep wages high, and demonizing those who gained great wealth from the revolution in technology.
This view seems to be that the depression became great by the initial response to it, rather than it was great in and of itself. It is an interesting theory, one I probably don't subscribe to. However, the fact of productivity improvement as well as the expansion in capital markets probably does need to factor into any meaningful analysis.
Tuesday, July 28, 2009
The PM takes a break
As we know when our Prime Minister takes a break we get an essay. His latest missive has again come under attack for its supposed gross generalisations of the cause of the current crisis. Given the extent of the criticism it is surprising how little the PM actually wrote about this.
Following a description of the three stage cause being burgeoning debt, an asset price bubble and huge capital flows from East to West, the PM has a short section on "the ideological hypocrisy of the right". Two paragraphs give the flavour of this;
This fundamentalist ideology of self-regulating markets has imploded comprehensively with the current crisis. We have seen spectacular market failure requiring equally spectacular government intervention in the economy to effectively save the system from itself.
Notwithstanding their support for the extreme free-market policies that have underpinned much of the crisis, the neo-liberals of the political right now refuse to accept any form of political responsibility for the fruits of their own ideological handiwork: the current global recession.
This is hardly dramatic stuff really. No one would actually dispute the Rudd description of the cause of the crisis, though one might like to go into a little more detail about how the process of burgeoning debt and asset price inflation fed off each other through a failure in the banking system to correctly analyse risk (or, more technically, by an incorrect belief that securtisation and derivatives had successfully diversified risk).
One might like to go a little more into how this failure reflects the weakness of the efficient market hypothesis and the fact that some of the information traders rely on is not fundamental information but the information they glean from the behaviour of other traders. (My favourite example is from the non-financial markets where the line that the capacity of the internet was doubling every hundred days was believed globally by telco execs even though the data on their own networks did not demonstrate it).
What the PM's thesis amounts to is that the crisis was generated by a belief in the efficiency of markts that was not supported in reality. What he is railing against is the group of economists (and politicians) who cannot release their belief in he market and hence believe that the market will "self correct".
Unfortunately Rudd does so by resorting to what Gerard Henderson identifies as tribal loyalty. While that may be a phrase offered by the sub-editor, Henederson states "his latest essay turns on far more partisanship than any that John Howard and Peter Costello engaged in". This though largely misses the point, Rudd is trying to bell-the-cat of the failings of the market as a reason to not accept the neoliberal prescriptions for the recovery.
Henderson chooses to criticise Rudd for labelling the neoliberal cause the "right", and from twin errors of not identifying that much of this "right" agenda was implemented by "progressive" governments - including those of Hawke, Keating and Clinton, and that much of what has been implemented here by the "right" has been of benefit. I think this criticism is poorly made in the current context. Rudd's intellectual battle now is only with neoliberals who reject the Keynesian response. Rudd is not proposing any fundamental leap back to a socialist nirvana of centrally planned economies - he is merely indicating that the "let the markets rip" school is inadequate.
If Gerard Henderson wants to see the ind of "right" that Rudd is combatting he should see the blog in the Oz that suggested "the Sydney Morning Herald and The Age morphed into something similar to the Pyongyang Post" by running the essay. The blog quotes from Sinclair Davidson arguing that Rudd got history "exactly wrong" in the description of the Australian response to the 1930s depression.
Let's just agree that the evidence on macro-responses to the Great Depressio is mixed at best. But Davidson's glittering nugget of wisdom is about who did better in a public service economics exam. Hmmm. How will we judge - the theorist whose book has been accomodated in some form into every classical theory or the bloke who beat him in his undergraduate exams?
A more measured blog also in the Oz is more focussed on whether Rudd's five pioints for recovery (regulation and competition reform, infrastructure, innovation, skills and tax) is sufficient and if he is turning his back on pro market reforms. This does seem odd since there is nothing other than the rhetorical attack on opponents of deficit spending at the trough of a recesson to suggest that Rudd is any different from his labour predecessors.
The biggest concern for market fans seems to be what is happening in the labour market. As far as I can see we are basically back to where we were in 1996 - reforms that fuelled the Howard decade. They look like the perfect kind of compromise between markets and regulation that Rudd is extolling for the whole economy.
The "right" should not over-react to the Rudd message. To do so will only create the incentive and opportunity to drive a far more centralist flavour in economic policy.
Following a description of the three stage cause being burgeoning debt, an asset price bubble and huge capital flows from East to West, the PM has a short section on "the ideological hypocrisy of the right". Two paragraphs give the flavour of this;
This fundamentalist ideology of self-regulating markets has imploded comprehensively with the current crisis. We have seen spectacular market failure requiring equally spectacular government intervention in the economy to effectively save the system from itself.
Notwithstanding their support for the extreme free-market policies that have underpinned much of the crisis, the neo-liberals of the political right now refuse to accept any form of political responsibility for the fruits of their own ideological handiwork: the current global recession.
This is hardly dramatic stuff really. No one would actually dispute the Rudd description of the cause of the crisis, though one might like to go into a little more detail about how the process of burgeoning debt and asset price inflation fed off each other through a failure in the banking system to correctly analyse risk (or, more technically, by an incorrect belief that securtisation and derivatives had successfully diversified risk).
One might like to go a little more into how this failure reflects the weakness of the efficient market hypothesis and the fact that some of the information traders rely on is not fundamental information but the information they glean from the behaviour of other traders. (My favourite example is from the non-financial markets where the line that the capacity of the internet was doubling every hundred days was believed globally by telco execs even though the data on their own networks did not demonstrate it).
What the PM's thesis amounts to is that the crisis was generated by a belief in the efficiency of markts that was not supported in reality. What he is railing against is the group of economists (and politicians) who cannot release their belief in he market and hence believe that the market will "self correct".
Unfortunately Rudd does so by resorting to what Gerard Henderson identifies as tribal loyalty. While that may be a phrase offered by the sub-editor, Henederson states "his latest essay turns on far more partisanship than any that John Howard and Peter Costello engaged in". This though largely misses the point, Rudd is trying to bell-the-cat of the failings of the market as a reason to not accept the neoliberal prescriptions for the recovery.
Henderson chooses to criticise Rudd for labelling the neoliberal cause the "right", and from twin errors of not identifying that much of this "right" agenda was implemented by "progressive" governments - including those of Hawke, Keating and Clinton, and that much of what has been implemented here by the "right" has been of benefit. I think this criticism is poorly made in the current context. Rudd's intellectual battle now is only with neoliberals who reject the Keynesian response. Rudd is not proposing any fundamental leap back to a socialist nirvana of centrally planned economies - he is merely indicating that the "let the markets rip" school is inadequate.
If Gerard Henderson wants to see the ind of "right" that Rudd is combatting he should see the blog in the Oz that suggested "the Sydney Morning Herald and The Age morphed into something similar to the Pyongyang Post" by running the essay. The blog quotes from Sinclair Davidson arguing that Rudd got history "exactly wrong" in the description of the Australian response to the 1930s depression.
Let's just agree that the evidence on macro-responses to the Great Depressio is mixed at best. But Davidson's glittering nugget of wisdom is about who did better in a public service economics exam. Hmmm. How will we judge - the theorist whose book has been accomodated in some form into every classical theory or the bloke who beat him in his undergraduate exams?
A more measured blog also in the Oz is more focussed on whether Rudd's five pioints for recovery (regulation and competition reform, infrastructure, innovation, skills and tax) is sufficient and if he is turning his back on pro market reforms. This does seem odd since there is nothing other than the rhetorical attack on opponents of deficit spending at the trough of a recesson to suggest that Rudd is any different from his labour predecessors.
The biggest concern for market fans seems to be what is happening in the labour market. As far as I can see we are basically back to where we were in 1996 - reforms that fuelled the Howard decade. They look like the perfect kind of compromise between markets and regulation that Rudd is extolling for the whole economy.
The "right" should not over-react to the Rudd message. To do so will only create the incentive and opportunity to drive a far more centralist flavour in economic policy.
Monday, July 27, 2009
What a great story
It appears that the voice to text service offered by Telstra and some other global carriers is not fully aoutomated.
This creates an interesting challenge. There is nothing wrong technically with the service provider using human agents to do this, heck they've offered human agents doing it in products that we call "call screen". The issue is that neither caller or service subscriber as aware that people might be involved.
A most interesting story.
This creates an interesting challenge. There is nothing wrong technically with the service provider using human agents to do this, heck they've offered human agents doing it in products that we call "call screen". The issue is that neither caller or service subscriber as aware that people might be involved.
A most interesting story.
Thursday, July 23, 2009
"Unreasonable" and legal arguments based on economic principles
I have been wading through the Federal Court's recent decision to reject a number of appeals from Telstra over ULLS and LSS arbitration decisions.
Let me first remind my readers (and myself) that as a lwayer I am strictly of the "bush" variety. Let me follow that by saying I have not been reading the judgement for all its fine detail. One of the interesting things about telco law has been that the absence of significant case law has mant that people like me can be as much use as a lawyer - because the interpretation has rested on the legislative wording.
This decision changes much of this. There are six areas in which Telstra claimed an error had occurred;
Pooling and Allocation Method
ULLS Model Terms
Call Diversion
Weighted Average Cost of Capital (WACC)
Line Costs
2007 LSS Pricing Principles
Each seems to reveal an interesting legal point for future consideration.
Pooling ad Allocation Method
This refers to a feature in the LSS and ULL pricing for which I take personal credit. The argument that the costs Telstra incurs for providing wholesale access to these services (e.g. ordering and provisioning systems) should be recovered across all copper pairs not just the pairs used for the service was first raised in submissions prepared by AAPT. It took me a while between my lawyer and economist to get it into a reasonable shape.
The argument got a life when Telstra stupidly responded to the 2003 indicative prices with an undertaking at those prices but repeating all its old arguments. This the ACCC interpreted as a "set-up" and consequently re-evaluated everything. This was when Optus joined the fray and improved the argument by pointing out that all copper customers in fact benefited from the competition that ensued.
Telstra's claim was that s152CR(1)(d) of the TPA required the Commission to "take into account" the direct costs of providing the service in determining the access price. The court found in this and an earlier case that he Commission did take the direct cost into account. Mosre specifically "taking into account" did not require the access charge to deal with the direct cost in any particular way.
ULLS Model Terms
This claim was somewhat similar in that the legislation required the ACCC to have required to model terms it was required to prepare under lgislation. Telstra claimed that the Commission had erred by not having regard to these terms.
Telstra failed in this claim in a number of ways. The most telling was that the adoption of the Pooling Method above meant that the 2003 model terms were not operative to the extent of any inconsistency. The court also demonstrated that the Commission did have regard to the model terms and explained their reasons for deviating from them.
Call Diversion
The call diversion claim rested on one of the underexplored areas of the access regime, s152CP(2) which enables the Commission determination to deal with any matter relating to acess. The judgement gives a great deal of consideration to the matter, both interegating the specifics of how the call diversion charge relates to the declared service for which the determination is made, and the legislative purposes of the access regime. It concludes that the Commission was entitled to make this determination.
This part of the judgement could be particularly useful were PartXIC to get much more continued future usage.
Weighted Average Cost of Capital
It is in the consideration of the process for determining the WACC that we see some really interesting arguments. There were two grounds claimed - that to a lay person - look the same. The first was that the ACCC made an error of law when determining the WACC as the ACCC based its determination of the WACC on a manifestly erroneous methodology involving economic principle. The second ground is that the ACCC acted so unreasonably and irrationally that no reasonable person could have so exercised the power.
Part of the argument resolved around whether assumptions in the CAPM of a homogeneous investor population were warranted, and Telstra's contention that the reality of a heterogenous investor base means a premium needs to be provided to the WACC. Telstra also identified what it called a "welfare assymetry" in setting the WACC, claiming that there are more dire onsequences from underestimating the WACC than overestimating it.
Telstra's principle claim in support of its contention was that the Commission had assumed a homogeneity of investor preferences in setting the WACC, but a hetergeneity of investor preference in rejecting the welfare asymetry argument.
The court first finds that there is nothing in the Act that actualy requires the ACCC to establish a WACC, and hence an error in determining it would not be an error in law, but an error in the ACCC's reasoning processes. The court also refers to authorities who distinguish between the claims that something is "illogica" and that reasoning can simply be wrong. Wrong reasoning does not become an error in law.
But the line that caught my eye was in relation to Telstra's capital strke argument wherein the court found "[The Commission] was at liberty to consider that in the real world investors do not behave in the way in which the capital strike proposition would have them behave." It continues;
It seems to me that the expression “assumptions” in relation to the CAPM is ambiguous. It may be that, outside the realm of economics, the word “assumption” is not the best word to refer to such things as homogeneity of expectations, no inflation and no personal income taxes. The CAPM does not assume those things in the real world in the sense that the CAPM loses its validity if they do not in fact reflect the real world. The CAPM makes assumptions in the sense of putting certain things to one side. The model can work and be a useful tool for the purpose of addressing only those things with which it deals.
This I think is the ultimte point for any consideration of "economic principles" together with questions of "manifestly erroneous methodology" or "unreasonably or irrationally". Any economic principle theory or model requires "certain things to be put to one side". It hence seems that it is a very high bar to ever argue that the way a decision maker relies on economic principles is unreasonable. More specifically the question of reasonableness actually lies outside the economic principle, not within it.
Line Costs
The line costs argument relates to whether the LSS should contribute a share of the line cost. It is a matter on which I always disagreed with my industry colleagues and argued should be included (on the same basis that the LSS specific costs should be pooled). Telstra however only ran the legal argument that there was no evidence for the finfding and that they Commission had failed to inquire. I personally found both to be too legally esoteric for me.
I would have been far more interested in seeing Telstra mount the claim in the terms attempted for the WACC. That is, that it is "manifestly erroneous methodology" or "unreasonably or irrationally" to pool the LSS specific costs but not "pool" the line costs. Maybe that will be round three.
Pricing Principles
Another esoteric point on whether the Comission could make pricing principles when principles already applied, and how the factof two separate pricing principles played out in the context of an arbitration that covered a period in the middle of which the second set of principles were made. I have not bothered to read the detail of this because I am more interested in the related part - that is - the Commission only has to have regard to the principles.
Conclusion
This judgement provides some interesting insights into what the requirements are for a decision maker to "have regard" to something or taking something "into account". It also provides some interesting guidance on the principle of "relating to". In both cases the conclusions seem to result in outcomes that confirm the very wide discretion of the ACCC. This might not be the loss for Telstra that it might at first seem. Telstra and Henry Ergas have argued that the ACCC has excessive discretion in Part XIC and the judgement only serves to demonstrate how wide that discretion is.
The more damaging element seems to be the conclusion about "manifestly erroneous methodology" or "unreasonably or irrationally" when used in the context of argument on economic principles. Put bluntly the court has really found that as any economic argument sets aside certain tings it can never be found to be manifestly unreasonable. It opens up a question of whether the whole field of competition law has gone up a blind alley by referring to some generic concepts in legislation and leaving it to subsequent economic and legal argument to work out the detail.
It is perhaps the more unfortunate reality that economic thery is not up to the task required of it by legislation. While we have a theory of physical mechanics that can, for example, let us conclude from the position and skid marks of two vehicles after a accident what their velocities were before it, our economic theory comes nowhere near the same level of specificity and continues to rely on theories that "set aside" certain things not because the effect of them might be small (like air resistance would be in the crash model) but because they make the model too hard.
Let me first remind my readers (and myself) that as a lwayer I am strictly of the "bush" variety. Let me follow that by saying I have not been reading the judgement for all its fine detail. One of the interesting things about telco law has been that the absence of significant case law has mant that people like me can be as much use as a lawyer - because the interpretation has rested on the legislative wording.
This decision changes much of this. There are six areas in which Telstra claimed an error had occurred;
Pooling and Allocation Method
ULLS Model Terms
Call Diversion
Weighted Average Cost of Capital (WACC)
Line Costs
2007 LSS Pricing Principles
Each seems to reveal an interesting legal point for future consideration.
Pooling ad Allocation Method
This refers to a feature in the LSS and ULL pricing for which I take personal credit. The argument that the costs Telstra incurs for providing wholesale access to these services (e.g. ordering and provisioning systems) should be recovered across all copper pairs not just the pairs used for the service was first raised in submissions prepared by AAPT. It took me a while between my lawyer and economist to get it into a reasonable shape.
The argument got a life when Telstra stupidly responded to the 2003 indicative prices with an undertaking at those prices but repeating all its old arguments. This the ACCC interpreted as a "set-up" and consequently re-evaluated everything. This was when Optus joined the fray and improved the argument by pointing out that all copper customers in fact benefited from the competition that ensued.
Telstra's claim was that s152CR(1)(d) of the TPA required the Commission to "take into account" the direct costs of providing the service in determining the access price. The court found in this and an earlier case that he Commission did take the direct cost into account. Mosre specifically "taking into account" did not require the access charge to deal with the direct cost in any particular way.
ULLS Model Terms
This claim was somewhat similar in that the legislation required the ACCC to have required to model terms it was required to prepare under lgislation. Telstra claimed that the Commission had erred by not having regard to these terms.
Telstra failed in this claim in a number of ways. The most telling was that the adoption of the Pooling Method above meant that the 2003 model terms were not operative to the extent of any inconsistency. The court also demonstrated that the Commission did have regard to the model terms and explained their reasons for deviating from them.
Call Diversion
The call diversion claim rested on one of the underexplored areas of the access regime, s152CP(2) which enables the Commission determination to deal with any matter relating to acess. The judgement gives a great deal of consideration to the matter, both interegating the specifics of how the call diversion charge relates to the declared service for which the determination is made, and the legislative purposes of the access regime. It concludes that the Commission was entitled to make this determination.
This part of the judgement could be particularly useful were PartXIC to get much more continued future usage.
Weighted Average Cost of Capital
It is in the consideration of the process for determining the WACC that we see some really interesting arguments. There were two grounds claimed - that to a lay person - look the same. The first was that the ACCC made an error of law when determining the WACC as the ACCC based its determination of the WACC on a manifestly erroneous methodology involving economic principle. The second ground is that the ACCC acted so unreasonably and irrationally that no reasonable person could have so exercised the power.
Part of the argument resolved around whether assumptions in the CAPM of a homogeneous investor population were warranted, and Telstra's contention that the reality of a heterogenous investor base means a premium needs to be provided to the WACC. Telstra also identified what it called a "welfare assymetry" in setting the WACC, claiming that there are more dire onsequences from underestimating the WACC than overestimating it.
Telstra's principle claim in support of its contention was that the Commission had assumed a homogeneity of investor preferences in setting the WACC, but a hetergeneity of investor preference in rejecting the welfare asymetry argument.
The court first finds that there is nothing in the Act that actualy requires the ACCC to establish a WACC, and hence an error in determining it would not be an error in law, but an error in the ACCC's reasoning processes. The court also refers to authorities who distinguish between the claims that something is "illogica" and that reasoning can simply be wrong. Wrong reasoning does not become an error in law.
But the line that caught my eye was in relation to Telstra's capital strke argument wherein the court found "[The Commission] was at liberty to consider that in the real world investors do not behave in the way in which the capital strike proposition would have them behave." It continues;
It seems to me that the expression “assumptions” in relation to the CAPM is ambiguous. It may be that, outside the realm of economics, the word “assumption” is not the best word to refer to such things as homogeneity of expectations, no inflation and no personal income taxes. The CAPM does not assume those things in the real world in the sense that the CAPM loses its validity if they do not in fact reflect the real world. The CAPM makes assumptions in the sense of putting certain things to one side. The model can work and be a useful tool for the purpose of addressing only those things with which it deals.
This I think is the ultimte point for any consideration of "economic principles" together with questions of "manifestly erroneous methodology" or "unreasonably or irrationally". Any economic principle theory or model requires "certain things to be put to one side". It hence seems that it is a very high bar to ever argue that the way a decision maker relies on economic principles is unreasonable. More specifically the question of reasonableness actually lies outside the economic principle, not within it.
Line Costs
The line costs argument relates to whether the LSS should contribute a share of the line cost. It is a matter on which I always disagreed with my industry colleagues and argued should be included (on the same basis that the LSS specific costs should be pooled). Telstra however only ran the legal argument that there was no evidence for the finfding and that they Commission had failed to inquire. I personally found both to be too legally esoteric for me.
I would have been far more interested in seeing Telstra mount the claim in the terms attempted for the WACC. That is, that it is "manifestly erroneous methodology" or "unreasonably or irrationally" to pool the LSS specific costs but not "pool" the line costs. Maybe that will be round three.
Pricing Principles
Another esoteric point on whether the Comission could make pricing principles when principles already applied, and how the factof two separate pricing principles played out in the context of an arbitration that covered a period in the middle of which the second set of principles were made. I have not bothered to read the detail of this because I am more interested in the related part - that is - the Commission only has to have regard to the principles.
Conclusion
This judgement provides some interesting insights into what the requirements are for a decision maker to "have regard" to something or taking something "into account". It also provides some interesting guidance on the principle of "relating to". In both cases the conclusions seem to result in outcomes that confirm the very wide discretion of the ACCC. This might not be the loss for Telstra that it might at first seem. Telstra and Henry Ergas have argued that the ACCC has excessive discretion in Part XIC and the judgement only serves to demonstrate how wide that discretion is.
The more damaging element seems to be the conclusion about "manifestly erroneous methodology" or "unreasonably or irrationally" when used in the context of argument on economic principles. Put bluntly the court has really found that as any economic argument sets aside certain tings it can never be found to be manifestly unreasonable. It opens up a question of whether the whole field of competition law has gone up a blind alley by referring to some generic concepts in legislation and leaving it to subsequent economic and legal argument to work out the detail.
It is perhaps the more unfortunate reality that economic thery is not up to the task required of it by legislation. While we have a theory of physical mechanics that can, for example, let us conclude from the position and skid marks of two vehicles after a accident what their velocities were before it, our economic theory comes nowhere near the same level of specificity and continues to rely on theories that "set aside" certain things not because the effect of them might be small (like air resistance would be in the crash model) but because they make the model too hard.
Wednesday, July 22, 2009
One step forward - a thousand steps back
Go for it Democrats. Your big breakthrough is to get an Anti-Clean Feed campaigner to head your technology policy committee...from EFA what's more.
Let's see if that gets you 1000 people!
Let's see if that gets you 1000 people!
Ahh the idiot branch of the Democrat family
Down Adelaide way the last surviving Australian Democrat parliamentarian has made a bit of a stink.
He's challenged the Democrats to find 1000 members in four months or else he will resign. This is part of the delusion many of the last remaining Democrats went through that their own election chances were impeded by the "Democrats" brand rather than enhanced by it. It also reflects the incredibly unhappy relationship in the party betwen its parliamentarians and its party officials - a state that became very public through the Meg Lees meltdown. However it is also partly modelled on a very successful strategy used by Arthur Chesterfield-Evans in NSW to generate a large number of party memberships to retain party registration.
However the Dems should find solace in the fact that even the big boys of politics regularly go through this rough and tumble. But the one thing they should all learn is that slagging off at each other is the wrong way.
So - to President Julia Melland I say your better response to Mr Winderlich's "threat" was to embrace it. The response should have been "we are pleased to see that SA MLC DW has embraced the current campaign of party rebuilding being undertaken by the Democrats. As our most public face and influence in South Australia nobody has as much opportunity as David to advance the membership drive is SA. If we don't reach the target it will be a responsibility David will have to share with the party."
As to Natash Stott-Despoja trumpetting the line that the seat "belonged" to the partyu not the individual, this was a line she first tried out when Meg Lees lft the party. It wasn't very effective then.
But it was a line she conveniently forgot once she and Andrew Murray had decided to not contest the 2007 election. The sensible course was to resign and allow the party to replace her with the person who would be the candidate - providing the benefits of incumbency for campaigning and removing the distraction of conflicting voices. She did not - partly on the basis that Andrew Murray would not - but also partly on the claim that "she" had been elected not the party.
He's challenged the Democrats to find 1000 members in four months or else he will resign. This is part of the delusion many of the last remaining Democrats went through that their own election chances were impeded by the "Democrats" brand rather than enhanced by it. It also reflects the incredibly unhappy relationship in the party betwen its parliamentarians and its party officials - a state that became very public through the Meg Lees meltdown. However it is also partly modelled on a very successful strategy used by Arthur Chesterfield-Evans in NSW to generate a large number of party memberships to retain party registration.
However the Dems should find solace in the fact that even the big boys of politics regularly go through this rough and tumble. But the one thing they should all learn is that slagging off at each other is the wrong way.
So - to President Julia Melland I say your better response to Mr Winderlich's "threat" was to embrace it. The response should have been "we are pleased to see that SA MLC DW has embraced the current campaign of party rebuilding being undertaken by the Democrats. As our most public face and influence in South Australia nobody has as much opportunity as David to advance the membership drive is SA. If we don't reach the target it will be a responsibility David will have to share with the party."
As to Natash Stott-Despoja trumpetting the line that the seat "belonged" to the partyu not the individual, this was a line she first tried out when Meg Lees lft the party. It wasn't very effective then.
But it was a line she conveniently forgot once she and Andrew Murray had decided to not contest the 2007 election. The sensible course was to resign and allow the party to replace her with the person who would be the candidate - providing the benefits of incumbency for campaigning and removing the distraction of conflicting voices. She did not - partly on the basis that Andrew Murray would not - but also partly on the claim that "she" had been elected not the party.
Oh dear Kevin
There is one consistent voice out there bagging the NBN - this is Kevin Morgan. He was at it again in yesterday's Age.
Kevin is a former policy officer for the technicians union and has been battling competition reforms and privatisation for years. It does seem somewhat strange that he now seems to come into battle on the side of the privatised Telstra, versus a new Government owned network. Perhaps it is just that defending the network operator has become ingrained.
But he really loses me when he argues that there is an inherent risk in building the network without the incumbent operator being involved. He spins a line about how the strong cash flows and balance sheet can provide security of funding. e however, in this point, also misses the inherent problem incumbents usually have of cannibalisation of that cash flow. Our most recent example was Telstra's reluctance to pursue early versions of ADSL offering sppeds of 256Kbps to "compete" with ISDN delivering speds of 128Kbps.
But that wasn't the first instance. At the 1910 Royal Commissio into the postal service the director-general was questioned about telegram and long distance telephone call rates. He stated that he could drop the price of the telephone calls but it wouldn't make sense given what it would do to telegraph revenues!
Kevin's big call is;
The concept of a wholesale network can only work if access to high-speed broadband is deemed to be a social good, which is not measured by commercial rates of returns. Nevertheless, the Government believes its network can get a commercial rate of return that will attract private-sector investment in the short term and be successful to merit full privatisation five years after it is completed. The Government is deluding itself and squandering millions of dollars on a project that hasn't the remotest chance of commercial success.
In some ways I agree with him about the need to recognise there is a social return here not just a commercial one. I've already written here about part of that issue. There are lots of really easy ways to organise this venture to work.
The only other issue I'd mention is this belief that customers won't swarm to the NBN. Let's just note that a sensible NBN builder will be building in those parts of metropolitan markets where ADSL is not or only barely available. That's quite a bit for the first two years. Then you start building where even ADSL2+ gives you at most 4Mbps. We are now about five years into the build? Will the 40% of premises whose best offer in 2014 is ADSL2+ be clamouring for more...well just ask yourself what people in 2004 were after - that's right just about when ADSL started being challenged by ADSL 2+.
Time we all - including "independent" consultants - took a deep breath.
Kevin is a former policy officer for the technicians union and has been battling competition reforms and privatisation for years. It does seem somewhat strange that he now seems to come into battle on the side of the privatised Telstra, versus a new Government owned network. Perhaps it is just that defending the network operator has become ingrained.
But he really loses me when he argues that there is an inherent risk in building the network without the incumbent operator being involved. He spins a line about how the strong cash flows and balance sheet can provide security of funding. e however, in this point, also misses the inherent problem incumbents usually have of cannibalisation of that cash flow. Our most recent example was Telstra's reluctance to pursue early versions of ADSL offering sppeds of 256Kbps to "compete" with ISDN delivering speds of 128Kbps.
But that wasn't the first instance. At the 1910 Royal Commissio into the postal service the director-general was questioned about telegram and long distance telephone call rates. He stated that he could drop the price of the telephone calls but it wouldn't make sense given what it would do to telegraph revenues!
Kevin's big call is;
The concept of a wholesale network can only work if access to high-speed broadband is deemed to be a social good, which is not measured by commercial rates of returns. Nevertheless, the Government believes its network can get a commercial rate of return that will attract private-sector investment in the short term and be successful to merit full privatisation five years after it is completed. The Government is deluding itself and squandering millions of dollars on a project that hasn't the remotest chance of commercial success.
In some ways I agree with him about the need to recognise there is a social return here not just a commercial one. I've already written here about part of that issue. There are lots of really easy ways to organise this venture to work.
The only other issue I'd mention is this belief that customers won't swarm to the NBN. Let's just note that a sensible NBN builder will be building in those parts of metropolitan markets where ADSL is not or only barely available. That's quite a bit for the first two years. Then you start building where even ADSL2+ gives you at most 4Mbps. We are now about five years into the build? Will the 40% of premises whose best offer in 2014 is ADSL2+ be clamouring for more...well just ask yourself what people in 2004 were after - that's right just about when ADSL started being challenged by ADSL 2+.
Time we all - including "independent" consultants - took a deep breath.
Use and Abuse of History
This new book by Margaret MacMillan looks like a worthy read on the topic of the use and abuse of history.
Apparently one of her conclusions is;
That history’s ultimate utility does not lie in its predictive or even its explanatory value, but in its ability to teach humility, to nurture an appreciation of the limits on our capacity to see the past clearly or to know fully the historical determinants of our own brief passage in time.
I think I can subscribe to that. If anyone has read it give me a shout!
Apparently one of her conclusions is;
That history’s ultimate utility does not lie in its predictive or even its explanatory value, but in its ability to teach humility, to nurture an appreciation of the limits on our capacity to see the past clearly or to know fully the historical determinants of our own brief passage in time.
I think I can subscribe to that. If anyone has read it give me a shout!
Lord of the ... card
Having returned to the land of the concious after a sjhort bout of flu (Tamiflu is wonderous stuff - but you need to take it early - so do see your doctor as soon as symptoms develop), I was pleased to find a story on a health related matter.
The story relates to a paper by Jennifer Doggett for the Centre for Policy Development. In a Tolkien-esque kind of way the paper calls for "one card to rule them all" - it is a health payment card that works as both an access to the underlying funds (e.g. Medicare and any private health fund) as well as creating acess to a kind of Health Loan system (like HECS) and to a single Safety Net regime to limit payments.
Actually it all sounds tremendously sensible. We could do with some other changes too though. These include eliminating the idea that the Medicare rebate amount is the "scheduled fee" and noting instead is simply the amount that Medicare has agreed to pay, removing the idiotic logic that "bulk-billing" meant the doctor had to take a fee cut (though that goes anyway) and finally requiring doctors to advertise their fees in a "meaningful" way. The last part could be by way of an index across a weighted range of typical consultations and procedures and state that the Doctor charges xxx% of the standard Medicare rebate. It probably needs to be matched with the existing quotation of basic consultation, and perhaps an indication of what the maximum mark-up might be.
But the biggest stumbling block for the innovative idea is the simple IT challenge. As a report in Saturday's SMH made clear, even getting agreement to implement a common health identifier is a challenge!
Finally, how long can it be before we decide the simplest way of dealing with both the health identifier and the credit card idea is to simply microchip us all. It works as a technology perfectly well for pets and livestock. What could be simpler for fronting to the receptionist at your doctor or arriving on a slab in an ambulance than having a microchip that can be wanded to provide your health ID and then full acess to your health record.
Privacy groups will start howling at this point but, heck, it only improves the ability to identify who I am. The number itself is no use to anyone - plus the chip itself should not contain the number but an encrypted version of it. It could be made relatively secure. If it were a voluntary option to have a microchip with your health ID on it would you have one - my answer is absolutely.
But the biggest problem in all this still remains the supply and demand side economies of scale. The costs become low and the benefits high only once you get a very large base of users of the health ID.
There is a long way to go - but some serious opportunities exist.
The story relates to a paper by Jennifer Doggett for the Centre for Policy Development. In a Tolkien-esque kind of way the paper calls for "one card to rule them all" - it is a health payment card that works as both an access to the underlying funds (e.g. Medicare and any private health fund) as well as creating acess to a kind of Health Loan system (like HECS) and to a single Safety Net regime to limit payments.
Actually it all sounds tremendously sensible. We could do with some other changes too though. These include eliminating the idea that the Medicare rebate amount is the "scheduled fee" and noting instead is simply the amount that Medicare has agreed to pay, removing the idiotic logic that "bulk-billing" meant the doctor had to take a fee cut (though that goes anyway) and finally requiring doctors to advertise their fees in a "meaningful" way. The last part could be by way of an index across a weighted range of typical consultations and procedures and state that the Doctor charges xxx% of the standard Medicare rebate. It probably needs to be matched with the existing quotation of basic consultation, and perhaps an indication of what the maximum mark-up might be.
But the biggest stumbling block for the innovative idea is the simple IT challenge. As a report in Saturday's SMH made clear, even getting agreement to implement a common health identifier is a challenge!
Finally, how long can it be before we decide the simplest way of dealing with both the health identifier and the credit card idea is to simply microchip us all. It works as a technology perfectly well for pets and livestock. What could be simpler for fronting to the receptionist at your doctor or arriving on a slab in an ambulance than having a microchip that can be wanded to provide your health ID and then full acess to your health record.
Privacy groups will start howling at this point but, heck, it only improves the ability to identify who I am. The number itself is no use to anyone - plus the chip itself should not contain the number but an encrypted version of it. It could be made relatively secure. If it were a voluntary option to have a microchip with your health ID on it would you have one - my answer is absolutely.
But the biggest problem in all this still remains the supply and demand side economies of scale. The costs become low and the benefits high only once you get a very large base of users of the health ID.
There is a long way to go - but some serious opportunities exist.
Wednesday, July 15, 2009
On science, mathematics and economics
A typically succint and lucid review in this month's Quadrant by David Armstrong of James Franklin's What Science Knows: And How it Knows It. Such a good review of have the book on order and Franjklin's two preceding works.
The idea I gather is that the book provides a riposte to the quartet of philosophers of science who gave postmodernism a big leg up (being Popper, Kuhn, Lakatos and Feyerabend).* The flavour of postmodernism here is that version that suggests any perspective is usful, that all knowledge is relative.
I personally think that the leap between these philosophers and that position is much greater than generally considered. Firstly these philosophers were being positive not normative - describing how they think science DOES operate, not how it ought to. And secondly all of them required that theories have at least some performance as means of "explaining things"...typically of relating historically observed potential causes with historically observed potential consequences.
Franklin's "magic" I think is to make the "explains" part of this stronger. An explanation is not just a "model" that relates the inputs to the outputs but some plausible structure, and observation supports a theory under what is a test of "the inference to the best explanation". One of the current criticisms of string theory is contained in a book called Not Even Wrong but not only does it fail the falsification test it fails an explanation test - there is nothing about current string theory that makes it attractive.
This also leads to some interesting discussion on the relationship between science and maths. The discussion revolves around the idea that maths itself is the study of "structures or patterns". As a consequence it provides an incredibly useful tol set for constructing scientific theories. The interesting part is that this view of mathematics means that there is no ontological commitment inherent in the maths itself. It is noteworthy that almost all modern science has borrowed pre-existing maths. I think the last time the scientist had to build his own maths was Newton building the calculus, and even it was developed at the same time by Leibnitz as a piece of "pure" mathematics.
This all relates to economics in two ways. The first is that it punctures Milton Friedman's conception of the philosophy of economics - his positvist version. Put in more standard philosophical terms Friedman was a straightforward instrumentalist - it doesn't matter what the machinery is in the middle so long as the theory relates the inputs to the outputs in the observed way.
But it also goes to the debate about the use of mathematics in economics. The maths doesn't bring any ontological commitment in and of itself. It is just a way of doing things. The biggest criticism of the use of maths in orthodox economics is the way the theory and facts are forced into the maths. In the same Quadrant issue such a theorist refers to markets saying that "there are differences in the speeds at which markets clear". It is a nonsense in the maths of the theory which assumes instantaneous clearing of the market. Once a lag is admitted between a signal and efect it is almost certain that the market will never actually clear, merely oscillate around a path that reflects something that might have bee an equilibrium point in a hypothetically instantaneously clearing market!
Still I plan to remain a fan of Feyerabend - the importance of his contribution is to the idea that it is okay at any time to try to find another theory - even if the one you are using "seems to work". It is a plea for lateral thinking, it is a plea for creativity, it is a plea for escaping bounded rationality. Real scientists do that says Feyerabend. They are not, however, anti-empirical nor merely relativist. They are, however, inquisitive and deeply suspicious.
* For those who don't know the title of this blog is taken from both a position ascribed generally to Feyerabend, and used by David Stove as the title of a book in response.
The idea I gather is that the book provides a riposte to the quartet of philosophers of science who gave postmodernism a big leg up (being Popper, Kuhn, Lakatos and Feyerabend).* The flavour of postmodernism here is that version that suggests any perspective is usful, that all knowledge is relative.
I personally think that the leap between these philosophers and that position is much greater than generally considered. Firstly these philosophers were being positive not normative - describing how they think science DOES operate, not how it ought to. And secondly all of them required that theories have at least some performance as means of "explaining things"...typically of relating historically observed potential causes with historically observed potential consequences.
Franklin's "magic" I think is to make the "explains" part of this stronger. An explanation is not just a "model" that relates the inputs to the outputs but some plausible structure, and observation supports a theory under what is a test of "the inference to the best explanation". One of the current criticisms of string theory is contained in a book called Not Even Wrong but not only does it fail the falsification test it fails an explanation test - there is nothing about current string theory that makes it attractive.
This also leads to some interesting discussion on the relationship between science and maths. The discussion revolves around the idea that maths itself is the study of "structures or patterns". As a consequence it provides an incredibly useful tol set for constructing scientific theories. The interesting part is that this view of mathematics means that there is no ontological commitment inherent in the maths itself. It is noteworthy that almost all modern science has borrowed pre-existing maths. I think the last time the scientist had to build his own maths was Newton building the calculus, and even it was developed at the same time by Leibnitz as a piece of "pure" mathematics.
This all relates to economics in two ways. The first is that it punctures Milton Friedman's conception of the philosophy of economics - his positvist version. Put in more standard philosophical terms Friedman was a straightforward instrumentalist - it doesn't matter what the machinery is in the middle so long as the theory relates the inputs to the outputs in the observed way.
But it also goes to the debate about the use of mathematics in economics. The maths doesn't bring any ontological commitment in and of itself. It is just a way of doing things. The biggest criticism of the use of maths in orthodox economics is the way the theory and facts are forced into the maths. In the same Quadrant issue such a theorist refers to markets saying that "there are differences in the speeds at which markets clear". It is a nonsense in the maths of the theory which assumes instantaneous clearing of the market. Once a lag is admitted between a signal and efect it is almost certain that the market will never actually clear, merely oscillate around a path that reflects something that might have bee an equilibrium point in a hypothetically instantaneously clearing market!
Still I plan to remain a fan of Feyerabend - the importance of his contribution is to the idea that it is okay at any time to try to find another theory - even if the one you are using "seems to work". It is a plea for lateral thinking, it is a plea for creativity, it is a plea for escaping bounded rationality. Real scientists do that says Feyerabend. They are not, however, anti-empirical nor merely relativist. They are, however, inquisitive and deeply suspicious.
* For those who don't know the title of this blog is taken from both a position ascribed generally to Feyerabend, and used by David Stove as the title of a book in response.
DE paper and books
The other event that occurred yesterday was the release by the Productivity Commission of their report on the parallel importation of books. I don't propose to engage directly here with most of that discussion - except to note in passing that David Marr in the SMH misapplies the "jumble of gargle" and should see the nonsense that Crikey sited yesterday written by authors about culture.
The books report is relevant to the discussion of the Digital Economy paper in a number of ways. One is the fact that the DE paper refers to the PC's draft report commentary on online sale of books - this commentary is carried forward into the final PC report. The commentary talks about the relatively low penetration of "on-line" books - with "on-line sales" contributing only 5% of all sales. The purpose of the commentary is to ascribe some purported slowness of Australian business to embrace online retail models.
It is a confused discussion. The world leader in online book sales - Amazon - is unique because it was a purpose built online seller, not a migration from a bricks-and-mortar store to online. It represents a clear example of how both supply and demand side economies of scale favouring market concentration lead to the ability to build strong single firms in global markets. And finally it is a nearly unique remnant of the original dot.com boom, it had a business model that worked whereas most other on-line "thingummy's" of the era did not.
What is mildly disappointing is that the e-book did not feature in the DE paper, nor as one of the formats provided for downloading it. I've already suggested that all Government reports should be made available in e-book format.
The PC's report notes hat;
Indeed, the treatment of electronic literary works, as far as parallel importation laws are concerned, is already more liberal than for hard copy works. Section 44E of the Copyright Act 1968 allows the parallel importation of an electronic literary work, when embodied in a physical digital form (such as an e-book on a CD or DVD).
If that interpretation is correct there is no reason why the Kindle eco-system should remain closed to Australians. The oppotunity to create that eco-system becomes immediate if it is not necessary to separately negotiate with every publisher over the copyright of the e-book version.
I suspect that Amazon's current vigorous restriction of e-book sales to North America is (a) that the regimes in many other jurisdictions are not as liberal and they are adopting a lowest common denopminator approach, (b) that negotiating with publishers to e-publish might be harder if Amazon marketed outside the US and hence this is a voluntary restraint and (c) the Kindle model is tied to not only selling the digital book, but the reader (like the iPod strategy) and to the particular connectivity model over the Sprint EVDO (CDMA) network.
So maybe there is hope. But another negative for the vision inherent in the Digital Economy - "online" and "books" is seen as being about purchase and delivery of bound papr rather than purchase and delivery of e-books.
The books report is relevant to the discussion of the Digital Economy paper in a number of ways. One is the fact that the DE paper refers to the PC's draft report commentary on online sale of books - this commentary is carried forward into the final PC report. The commentary talks about the relatively low penetration of "on-line" books - with "on-line sales" contributing only 5% of all sales. The purpose of the commentary is to ascribe some purported slowness of Australian business to embrace online retail models.
It is a confused discussion. The world leader in online book sales - Amazon - is unique because it was a purpose built online seller, not a migration from a bricks-and-mortar store to online. It represents a clear example of how both supply and demand side economies of scale favouring market concentration lead to the ability to build strong single firms in global markets. And finally it is a nearly unique remnant of the original dot.com boom, it had a business model that worked whereas most other on-line "thingummy's" of the era did not.
What is mildly disappointing is that the e-book did not feature in the DE paper, nor as one of the formats provided for downloading it. I've already suggested that all Government reports should be made available in e-book format.
The PC's report notes hat;
Indeed, the treatment of electronic literary works, as far as parallel importation laws are concerned, is already more liberal than for hard copy works. Section 44E of the Copyright Act 1968 allows the parallel importation of an electronic literary work, when embodied in a physical digital form (such as an e-book on a CD or DVD).
If that interpretation is correct there is no reason why the Kindle eco-system should remain closed to Australians. The oppotunity to create that eco-system becomes immediate if it is not necessary to separately negotiate with every publisher over the copyright of the e-book version.
I suspect that Amazon's current vigorous restriction of e-book sales to North America is (a) that the regimes in many other jurisdictions are not as liberal and they are adopting a lowest common denopminator approach, (b) that negotiating with publishers to e-publish might be harder if Amazon marketed outside the US and hence this is a voluntary restraint and (c) the Kindle model is tied to not only selling the digital book, but the reader (like the iPod strategy) and to the particular connectivity model over the Sprint EVDO (CDMA) network.
So maybe there is hope. But another negative for the vision inherent in the Digital Economy - "online" and "books" is seen as being about purchase and delivery of bound papr rather than purchase and delivery of e-books.
Close but no cigar
Senator Conroy launched his Digital Economy Future Directions report last night. It has already received some positive coverage including from DE blogger Verity Pravda.
Even before its release Mr Negative Nick Minchin decided to have a go at the report over an apparent contradicition of the report referring to the development of the DE as a "market-led phenomenon" while the Government proposes to intercede in the space by building the "transport" infrastructure. However, one could note that agriculture has always been a market-led activity whhile Government has invested in road and rail infrastructure to enable it.
My own concern is that a paper on the "Digital Economy" is still scant on questions of hard economics. I worry that not enough attention is paid to the ways that production economics change, and the speed of transmittal of information change. These fundamentally change assumptions about markets - firstly more industries will be dominated by one or a few firms, and systemic risk can be communicated through the system like a pandemic.
I also think more space could be devoted to understanding "growth" and what is known as "new growth theory" or "endogenous growth theory". This is because the underlying assumption is that the private investment of firms in new capabilities continues to have diminishing returns, but has constant returns across the economy due to "spill-over" efects. This becomes of particular concern because of the modern Australian obsession with "commercialising" R&D outcomes. This desire runs counter to some of the themes of open systems and , in the IP space, the Creative Commons licences.
We need instead to focus more on the concept of "leveraging" R&D outcomes than one model of leverage which is direct "commercialisation". (I may return to this another day).
These things matter because ultimately much of the report still hinges on a simplistic neo-classical model of an economy. Let me site one examle, that I've now started to overuse. The report asserts that resistance by business to taking up some digital solutions (transacting with customers) is a concern with security and reliability and not with whether customers have the technology.
I heard similar objections when we tried to sell call centre solutions to corporates in the late 1980s. However, the practical reality was they could forecast no real saving from alternative channels until they could actually close channels down. That couldn't happen till ALL customers would transact in the new mode.
Whether customers will transact is itself a kind of network effect. It has two elements - the first is needing to have a big enough mass actually with the technology. The second is that people promote it to each other. One way of generating the classical S-curve of technology adoption is to model a population on the assumption that person X will buy the service once enough of his friends do. The shape of that S-curve depends on a parameter that effectively measures "how reliant on others" are you. Australia's oft claimed rapid technology adoption is actually one with slow leadups then very sudden escalation. It is reflective of a society that places a higher value on the assessment of my peers (New Zealand is even more so - they are more like sheep than us).
In the reports discussion of regulatory structures it is a pity to see that the focus remains on classical "content" like media content, and not on the regulatory environment to support transactions. The Reserve Bank of Australia report on the weaknesses of our e-commerce transaction processes doesn't get a mention.
The book The Origins of Wealth distinguishes between Physical Technology (making stuff) and Social Technology (rules), and talks about how each develops (favouring an evolutionary description). Social Technology in this sense includes the capacity to co-operate across the economy. The regulatory structures section could have explored further the ways Government can "regulate" to encourage co-operative behaviour. It somewhere got lost in the mist of "self-regulation".
Finally the section on measurement missed two important points. The first is that we should not be frightened of counting things rather than generating data by sample. My example is we should be able to report a lot better on actual internet speeds and price performance than we do - if only Government was prepared to manipulate twenty million service records. The fact is that data is neither a large transmission task noer a large processing task. The second is that we really culd build our own version of a digital economy index that tried to bring together a number of disparate elements. Instead we get the report talking approvingly of the unbelievably shoddy survey report that AIG put together.
Finally, though there was a great deal of effort to talk of other industries, the report, the presentations and the showcase were all incredibly ICT focussed. We have a long way to go to get everybody to understand that the Digital Economy is more than fast broadband, video downloads, e-health and e-government.
The report should get some good reviews for bringing some structure to the discussion. It should be marked down for being an uneconomic discussion of the Digital Economy.
Even before its release Mr Negative Nick Minchin decided to have a go at the report over an apparent contradicition of the report referring to the development of the DE as a "market-led phenomenon" while the Government proposes to intercede in the space by building the "transport" infrastructure. However, one could note that agriculture has always been a market-led activity whhile Government has invested in road and rail infrastructure to enable it.
My own concern is that a paper on the "Digital Economy" is still scant on questions of hard economics. I worry that not enough attention is paid to the ways that production economics change, and the speed of transmittal of information change. These fundamentally change assumptions about markets - firstly more industries will be dominated by one or a few firms, and systemic risk can be communicated through the system like a pandemic.
I also think more space could be devoted to understanding "growth" and what is known as "new growth theory" or "endogenous growth theory". This is because the underlying assumption is that the private investment of firms in new capabilities continues to have diminishing returns, but has constant returns across the economy due to "spill-over" efects. This becomes of particular concern because of the modern Australian obsession with "commercialising" R&D outcomes. This desire runs counter to some of the themes of open systems and , in the IP space, the Creative Commons licences.
We need instead to focus more on the concept of "leveraging" R&D outcomes than one model of leverage which is direct "commercialisation". (I may return to this another day).
These things matter because ultimately much of the report still hinges on a simplistic neo-classical model of an economy. Let me site one examle, that I've now started to overuse. The report asserts that resistance by business to taking up some digital solutions (transacting with customers) is a concern with security and reliability and not with whether customers have the technology.
I heard similar objections when we tried to sell call centre solutions to corporates in the late 1980s. However, the practical reality was they could forecast no real saving from alternative channels until they could actually close channels down. That couldn't happen till ALL customers would transact in the new mode.
Whether customers will transact is itself a kind of network effect. It has two elements - the first is needing to have a big enough mass actually with the technology. The second is that people promote it to each other. One way of generating the classical S-curve of technology adoption is to model a population on the assumption that person X will buy the service once enough of his friends do. The shape of that S-curve depends on a parameter that effectively measures "how reliant on others" are you. Australia's oft claimed rapid technology adoption is actually one with slow leadups then very sudden escalation. It is reflective of a society that places a higher value on the assessment of my peers (New Zealand is even more so - they are more like sheep than us).
In the reports discussion of regulatory structures it is a pity to see that the focus remains on classical "content" like media content, and not on the regulatory environment to support transactions. The Reserve Bank of Australia report on the weaknesses of our e-commerce transaction processes doesn't get a mention.
The book The Origins of Wealth distinguishes between Physical Technology (making stuff) and Social Technology (rules), and talks about how each develops (favouring an evolutionary description). Social Technology in this sense includes the capacity to co-operate across the economy. The regulatory structures section could have explored further the ways Government can "regulate" to encourage co-operative behaviour. It somewhere got lost in the mist of "self-regulation".
Finally the section on measurement missed two important points. The first is that we should not be frightened of counting things rather than generating data by sample. My example is we should be able to report a lot better on actual internet speeds and price performance than we do - if only Government was prepared to manipulate twenty million service records. The fact is that data is neither a large transmission task noer a large processing task. The second is that we really culd build our own version of a digital economy index that tried to bring together a number of disparate elements. Instead we get the report talking approvingly of the unbelievably shoddy survey report that AIG put together.
Finally, though there was a great deal of effort to talk of other industries, the report, the presentations and the showcase were all incredibly ICT focussed. We have a long way to go to get everybody to understand that the Digital Economy is more than fast broadband, video downloads, e-health and e-government.
The report should get some good reviews for bringing some structure to the discussion. It should be marked down for being an uneconomic discussion of the Digital Economy.
Monday, July 13, 2009
The Hu case
According to Greg Sheridan "The bottom line is clear - if Hu is not released, our relationship with China is shattered." Is it?
It seems to be escaping most Australia commentators that Mr Hu may be guilty of the charge of paying bribes.
Sheridan continues "Only if the broad Australian civil society demonstrates its shock and anger at China's crude tactics of intimidation is there a chance that cooler heads in Beijing might see the damage these outrageous actions are doing to China's reputation internationally, as well as its interests in Australia." When is it outrageous to arrest a person suspected of espionage?
John Garnaut is at least a bit more measured in his analysis noting "The investigation appears to be part of a big realignment of how China manages its economy, with spy and security agencies promoted to top strategy-making bodies." This focuses more on the question of whether paying bribes should be considered as espionage rather than merely a commercial crime.
In reality a lot of this will depend on whatever facts are revealed. I can consider circumstances wherein Australian citizens would consider the bribing of Australian commercial negotiators for information as espionage, given the extent to which we like to claim sovereignty over our commercial interests.
And it isn't that long ago that all our commodity exports did go through Government sanctioned single desks, and one of our last remaining was guilty of a similar crime to Mr Hu. Excatly what would we think if AWB had been the recipient of bribes for information about the national negotiating position.
It is also noteworthy that Garnaut's sources dismiss the idea this is pay-back for the Chinalco deal falling through.
It is also interesting to note that the time-honoured cold war technique of dealing with espionage charges hasn't been used yet - fitting up a Chinese national on an espionage charge. So Rudd has still plenty of room to move.
It seems to be escaping most Australia commentators that Mr Hu may be guilty of the charge of paying bribes.
Sheridan continues "Only if the broad Australian civil society demonstrates its shock and anger at China's crude tactics of intimidation is there a chance that cooler heads in Beijing might see the damage these outrageous actions are doing to China's reputation internationally, as well as its interests in Australia." When is it outrageous to arrest a person suspected of espionage?
John Garnaut is at least a bit more measured in his analysis noting "The investigation appears to be part of a big realignment of how China manages its economy, with spy and security agencies promoted to top strategy-making bodies." This focuses more on the question of whether paying bribes should be considered as espionage rather than merely a commercial crime.
In reality a lot of this will depend on whatever facts are revealed. I can consider circumstances wherein Australian citizens would consider the bribing of Australian commercial negotiators for information as espionage, given the extent to which we like to claim sovereignty over our commercial interests.
And it isn't that long ago that all our commodity exports did go through Government sanctioned single desks, and one of our last remaining was guilty of a similar crime to Mr Hu. Excatly what would we think if AWB had been the recipient of bribes for information about the national negotiating position.
It is also noteworthy that Garnaut's sources dismiss the idea this is pay-back for the Chinalco deal falling through.
It is also interesting to note that the time-honoured cold war technique of dealing with espionage charges hasn't been used yet - fitting up a Chinese national on an espionage charge. So Rudd has still plenty of room to move.
Friday, July 10, 2009
Words and legislation
Given my spray about a pointless circular definition in a recent Bill, I was interested to note the comments of the Chief Justice of the High Court about the excessive leeway given to the courts to define words like "good faith". In the case in point effectively it is left to the court to define broadband.
Note: My earlier comment was wrong the newly defined term is used in the Bill, but ot in such a way that a definition was required.
Note: My earlier comment was wrong the newly defined term is used in the Bill, but ot in such a way that a definition was required.
NBN Board speculation
The main stream media is now getting right into the NBN Board speculation game, with both the Oz and the SMH joining the fray.
Nothing particularly new or insightful. A great worry from the SMH story is the suggestion that a lawyer might get a start - I have a firm view lawyers are not needed on Boards. Every Board member should be well enough appraised of their own legal responsibilities and it is a failure of governance for the Board as a whole to rely on the legal expertise of one director. In brief, the most use that the director with legal quals can provide is to advise his/her fellow directors is that they should get legal advice from their law firm – but the directors cannot rely on the advice of their legally trained colleague when he/she advises them not to do so. So lawyers add no technical benefit.
Far from their touted belief that legal training provides a disciplined thought process of use in wider fields, in reality their training is very restrictive to a certain kind of linguistic deductive process that is anathema to creative thinking.
This doesn't mean that a lawyer should be excluded, just that they shouldn't be chosen so there is a lawyer. The suggestion that the author of the Australian competition law "bible" would be the lawyer is particularly odd, given that we'd hope the structural separation of the NBN means it is not embroiled in competition issues.
I'm finding the speculation numbing. I made my contribution on who should be appointed. Speculating on who will be is just column inches for bored journalists.
Nothing particularly new or insightful. A great worry from the SMH story is the suggestion that a lawyer might get a start - I have a firm view lawyers are not needed on Boards. Every Board member should be well enough appraised of their own legal responsibilities and it is a failure of governance for the Board as a whole to rely on the legal expertise of one director. In brief, the most use that the director with legal quals can provide is to advise his/her fellow directors is that they should get legal advice from their law firm – but the directors cannot rely on the advice of their legally trained colleague when he/she advises them not to do so. So lawyers add no technical benefit.
Far from their touted belief that legal training provides a disciplined thought process of use in wider fields, in reality their training is very restrictive to a certain kind of linguistic deductive process that is anathema to creative thinking.
This doesn't mean that a lawyer should be excluded, just that they shouldn't be chosen so there is a lawyer. The suggestion that the author of the Australian competition law "bible" would be the lawyer is particularly odd, given that we'd hope the structural separation of the NBN means it is not embroiled in competition issues.
I'm finding the speculation numbing. I made my contribution on who should be appointed. Speculating on who will be is just column inches for bored journalists.
Thursday, July 09, 2009
Public service and external consultants
Is the defence to complaints about the expenditure on consultants by the Australian Government that they inherited a broken public service?
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